Thomas Picketty: "Germany Has Never Paid Its Debts"

You probably have heard of Thomas Picketty, the author of "Capital in the 21st Century."

He gave a recent interview to Die Zeit, a German magazine in which he bluntly stated that Germany is the only country in the world that has never paid its external debts.

Here is the link to an unofficial English translation.

Read the whole thing, it is great fun, if for nothing else to see how the reporter went from incredulity to squirming and how little he knew about the actual topic and German history.

When Picketty starts by saying that Germany is about to destroy the idea of Europe because of a shocking ignorance of history, the reporter defensively retorts with "we Germans have already reckoned with our own history."

Picketty disagrees:

But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. 

And he immediately goes for the jugular:

Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

Clearly, this is the first the reporter is hearing any of this. He meekly protests "but surely we can’t draw the conclusion that we can do no better today?"

Picketty has no intention of letting it go:

When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

So, the reporter tries another tack and asks Picketty whether he is "trying to depict states that don’t pay back their debts as winners."

Indeed, says, Picketty, "Germany is just such a state" and explains why the countries that pay their debt are losers and countries like Germany are the winners:

But wait: history shows us two ways for an indebted state to leave delinquency. One was demonstrated by the British Empire in the 19th century after its expensive wars with Napoleon. It is the slow method that is now being recommended to Greece. The Empire repaid its debts through strict budgetary discipline. This worked, but it took an extremely long time. For over 100 years, the British gave up two to three percent of their economy to repay its debts, which was more than they spent on schools and education. That didn’t have to happen, and it shouldn’t happen today. The second method is much faster. Germany proved it in the 20th century. Essentially, it consists of three components: inflation, a special tax on private wealth, and debt relief.

The reporter is aghast at this point because it sounds like those lazy Germans lived off other nations' taxpayers. What about our much vaunted economic miracle, he wonders:

 So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

You can almost see Picketty sarcastically grinning:

Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

In case you've never heard of London Debt Agreement, it actually included more than a 60 percent haircut for creditors.

An important term of the agreement was that repayments were only due while West Germany ran a trade surplus, and that repayments were limited to 3% of export earnings. This gave Germany’s creditors a powerful incentive to import German goods, assisting reconstruction.

Not too shabby, don't you think?

You get to pay your debts only when you are doing really well and even then your payments are tied to your exports so your creditors are motivated to buy your stuff to get their money back.

Tsipras asked for a much diluted version of this and he was laughed out of the room. And his latest proposal no longer covers debt relief or the 30 percent haircut, without which IMF said that Greece could never repay its debt. (The IMF report was never shared with Greece during previous talks)

By now, the Die Zeit reporter is grasping at straws. He has no questions, just statements.

The end of the Second World War was a breakdown of civilization. Europe was a killing field. Today is different.

Picketty refuses to play ball.

To deny the historical parallels to the postwar period would be wrong. Let’s think about the financial crisis of 2008/2009. This wasn’t just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25%. This is comparable to the recessions in Germany and France between 1929 and 1935.

The only thing left to the reporter is the moral argument about penance and punishment.

Many Germans believe that the Greeks still have not recognized their mistakes and want to continue their free-spending ways.

Picketty delivers the coup de grace:

If we had told you Germans in the 1950s that you have not properly recognized your failures, you would still be repaying your debts. Luckily, we were more intelligent than that.

Read the whole thing.

It is a perfect illustration of how people believe the nonsense the reproduce as objective news.